What Are Spreads in Trading and How to Use Them?

The spread is the difference between the buy price (ask) and the sell price (bid) of an asset. It is also the most underestimated trading cost: every position opens in negative territory by the amount of the spread. Definition, categories, and integration into your trading strategy.

## Simple Definition

On EURUSD, if the bid is at 1.0850 and the ask is at 1.0852, the spread is 2 pips. Buying immediately means your open position starts at 1.0850 — reflecting a 2-pip floating loss. Spread is paid upon entry AND exit; it is a permanent transaction cost through which brokers or prop firms generate revenue rather than charging flat commissions, depending on the account model.

## Three Main Spread Types

• Fixed: Constant regardless of market conditions — easy to calculate, though generally wider. Ideal for beginners requiring predictable costs.
• Variable: Fluctuates with supply and demand — tight during high liquidity (London/New York sessions), expanding rapidly during news or market open. The dominant forex model.
• Raw + Commission: Near-zero raw spread paired with a fixed commission per lot — favored by scalpers, as detailed in our scalping prop firm guide.

## Factors That Widen Spreads (And Cost You Money)

1. Liquidity: Exotic pairs and low market cap assets have wide spreads; major forex pairs feature the tightest spreads.
2. Trading Hours: Session overlaps tighten spreads; daily rollover (overnight) and weekends cause sharp spread widening.
3. Economic News: High-impact news trading can multiply spreads by 10x in seconds — alongside severe slippage.
4. Volatility: Panicked markets experience sudden spread expansion — paying the price of market stress.

## How to Use Spreads in Your Strategy

• Calculate Real Thresholds: With a 2-pip spread and a 20-pip stop loss, 10% of your trade goes to fees — your risk/reward ratio must account for this. A nominal 1:2 ratio becomes a real 1:1.8.
• Trade Optimal Hours: London/New York overlap for forex; regular market hours for indices — our indices guide highlights the optimal trading windows.
• Select Your Instruments: Focus on 3-4 assets with low spreads rather than a massive catalog — specialization reduces overhead costs.
• Avoid News Entry Risks: Enter prior to announcements or stay sidelined — when spreads spike unpredictably, trading becomes gambling.

## Spreads in Prop Firm Challenges

During evaluations, spreads double the stakes: profit targets are measured in net gains, and every fee pip is a pip deducted from your target. Prop firm demo accounts replicate live spreads — verify conditions before trading. Our guides on passing your first challenge and lot size calculation incorporate spread costs directly into sizing models.

## Conclusion

Spread is not a minor technical detail: it is the most frequent trading expense. Profitable traders do not try to avoid it entirely — they select appropriate instruments, schedules, and fee models, factoring spread into every setup. Mastering spread control is an essential part of overall trading discipline.